Tax Talk Thursday: Permanent Establishment: The Tax Line You Don’t Want to Accidentally Cross

Expanding your business across borders can be exciting — but it also comes with hidden tax risks. One of the most important and often overlooked is the concept of Permanent Establishment (PE) — a taxable presence in another country that can give that country the right to tax part of your profits.

What Is a Permanent Establishment?

A Permanent Establishment is a fixed place of business (like an office, store, or warehouse) in another country where you carry out core business activities (your main money-making work). If your presence is permanent (often more than 6–12 months) and not just for small, support tasks, it may be considered a PE.

How a PE Is Created:

The exact rules vary by treaty, but a PE is often triggered by:

1. Fixed Place of Business — A specific, ongoing location in another country.

2. Permanence — Staying there beyond the treaty’s time limit.

3. Business Activity — Doing main operations, not just prep work.

   
   

Common Types of Permanent Establishment

• Fixed Place PE – Opening an office or branch overseas.

• Construction or Installation PE – A project site lasting beyond the treaty limit (often 6–12 months).

• Agency PE – Having someone abroad (a dependent agent) who regularly signs or negotiates contracts for you.

• Service PE – Providing services in another country beyond the time limit (often 183 days in a 12-month period).

  
  

What Usually Doesn’t Create a PE

Many treaties exclude preparatory or auxiliary activities — support tasks that aren’t your main business, like advertising, storing goods, or market research.

Why This Matters:

If you have a PE:

• You may owe corporate tax in that country.

• You might have to register for VAT/GST (types of sales taxes in many countries).

• Transfer pricing rules apply — meaning you must price transactions with your PE as if you were dealing with an unrelated company (arm’s-length principle).

Modern PE Risk Triggers

• Remote Workers Abroad – An employee working from home in another country who negotiates contracts or manages major operations.

• Digital Presence – Some countries tax foreign businesses that have significant online activity with local customers (“digital PE”).

• Long-Term Subcontractors – Acting like agents for your company can trigger a PE.

Example: The PE Surprise

A U.S. consulting firm sends a manager to Canada for nine months. Under the U.S.–Canada treaty, providing services for more than 183 days in a 12-month period can create a Service PE — meaning Canada can tax that income and require a Canadian tax return.

How to Avoid or Manage PE Risk

1. Check the Tax Treaty before doing business in another country.

2. Limit Onsite Duration to stay below PE thresholds.

3. Use Independent Agents instead of dependent ones like a broker or distributor who works with many clients — acts in the ordinary course of their own business. They don’t rely on you for most of their income and don’t create a PE for you under most tax treaties.

4. Be Careful with Contracts — avoid giving local staff the authority to sign deals for you.

PE rules can apply to any size business. If you’re expanding overseas, hiring abroad, or taking on long projects in another country, understanding PE can help you avoid double taxation and costly compliance issues. If you are planning on doing business in another country, contact us at may.sung@mkhstaxgroup.com.